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Hidden Gaming in Hierarchies: Facts and Models

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  • JEAN‐JACQUES LAFFONT

Abstract

We study a three‐level hierarchy in which the role of the supervisor is to transmit to the entrepreneur (the principal) information about workers' individual performances We are concerned with a form of discretion which arises from monitoring personalized incentive schemes through a supervisor, that we call hidden gaming. The supervisor can use his discretionary power to organize games unobserved by the principal which enable him to extract benefits from workers. This extortion activity decreases the level of efficiency of the organization and it is shown to subsist partly even when the principal monitors the supervisor with the best incentive scheme based on his own information. In some circumstances non‐personalized incentive schemes are optimal because of hidden gaming. The paper concludes with a discussion of possible motivations for public intervention within organizations to eliminate extortions due to hidden gaming.

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  • Jean‐Jacques Laffont, 1988. "Hidden Gaming in Hierarchies: Facts and Models," The Economic Record, The Economic Society of Australia, vol. 64(4), pages 295-306, December.
    • Handle: RePEc:bla:ecorec:v:64:y:1988:i:4:p:295-306
    DOI: 10.1111/j.1475-4932.1988.tb02068.x
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    1. K.P. Kannan & N. Vijayamohanan Pillai, 2001. "The political economy of public utilities: A study of the power sector," Centre for Development Studies, Trivendrum Working Papers 316, Centre for Development Studies, Trivendrum, India.
    2. Breton, Albert, 1995. "Organizational hierarchies and bureaucracies: An integrative essay," European Journal of Political Economy, Elsevier, vol. 11(3), pages 411-440, September.
    3. Ingela Alger, 2006. "Optimal Debt Contracts when Credit Managers are (Perhaps) Corruptible," Boston College Working Papers in Economics 648, Boston College Department of Economics.
    4. Krakel, Matthias, 2003. "U-type versus J-type tournaments as alternative solutions to the unverifiability problem," Labour Economics, Elsevier, vol. 10(3), pages 359-380, June.
    5. McAfee, R Preston & McMillan, John, 1995. "Organizational Diseconomies of Scale," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 399-426, Fall.
    6. Lorens Imhof & Matthias Kräkel, 2016. "Ex post unbalanced tournaments," RAND Journal of Economics, RAND Corporation, vol. 47(1), pages 73-98, February.
    7. Choe, Chongwoo, 1998. "Contract design and costly verification games," Journal of Economic Behavior & Organization, Elsevier, vol. 34(2), pages 327-340, February.
    8. Jean‐Jacques Laffont, 1989. "A Brief Overview of the Economics of Incomplete Markets," The Economic Record, The Economic Society of Australia, vol. 65(1), pages 54-65, March.

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